If a health insurer asserts a subrogation claim on settlement funds and the client tells the lawyer not to pay it, what must the lawyer do?

Plain-English summary

A lawyer settled a tort claim. Before disbursing, a health insurance carrier notified the lawyer that it held a subrogation claim for medical expenses paid for the client's injuries. The lawyer had not promised to protect the carrier's claim. The client told the lawyer not to pay the carrier, said he would pay it himself (though the lawyer believed he would not), and demanded the lawyer disburse all proceeds to him. The questions were whether the lawyer must pay the client, notify the carrier, or hold the funds, and how to handle a release in which the lawyer "warrants" that all subrogation claims are paid.

The committee concluded that, because the lawyer had actual knowledge of the carrier's subrogation claim, Rule 1.15 requires holding the disputed funds in trust until the dispute between client and carrier is resolved. Relying on an authoritative treatment of prior South Carolina opinions, the committee explained the distinction: where a client has assigned an interest to a creditor, the lawyer may honor the assignment unless the client objects, but if the client directs the lawyer to ignore it, the lawyer should notify the assignee and hold the funds in trust until the dispute is resolved, even if the lawyer is not a party to the assignment (Opinions 92-06, 93-14, 94-20). By contrast, where an insurer has only a potential subrogation claim and has not notified the lawyer, the lawyer has no affirmative duty to contact the insurer and may disburse to the client while advising of the provider's right to seek subrogation (Opinion 93-31). Here, the carrier had given actual notice, so the affirmative duty to hold applied.

On the release, the committee concluded it would be improper, under Rule 8.4(d), for the lawyer to execute a release warranting that all subrogation claims had been paid when the lawyer knew one had not been paid, especially given the carrier's demand for payment.

In practice

Under this opinion, on the facts presented, a lawyer with actual notice of a subrogation claim must hold the disputed funds in trust rather than disburse them to the client, and cannot sign a release falsely warranting the claims are paid. The committee tied the holding duty to Rule 1.15 and the actual-knowledge distinction drawn in Opinions 92-06, 93-14, 94-20, and 93-31, and grounded the release limit in Rule 8.4(d).

Common questions

Q: The insurer notified me of a subrogation claim but my client says don't pay it. What do I do?

A: The committee concludes that because you have actual knowledge of the claim, Rule 1.15 requires you to hold the disputed funds in trust until the dispute between the client and the carrier is resolved.

Q: What if the insurer only might have a subrogation claim and never contacted me?

A: The committee, citing Opinion 93-31, says you have no affirmative duty to contact the insurer; you may disburse to the client but should advise the client of the provider's right to seek subrogation.

Q: Can I sign the standard release warranting all subrogation claims are paid?

A: No. The committee concludes that, under Rule 8.4(d), it would be improper to warrant all subrogation claims are paid when you know one has not been, particularly after the carrier's demand.

Background and rules framework

The opinion applies South Carolina's versions of Model Rule 1.15 (safekeeping property; holding disputed funds) and Model Rule 8.4(d) (conduct prejudicial to the administration of justice), at SCACR 407. It builds on prior South Carolina opinions distinguishing actual from potential subrogation/assignment claims (92-06, 93-14, 94-20, 93-31).

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15 (safekeeping property; duty to hold disputed funds in trust)
• MR 8.4 / SC Rule 8.4(d) (conduct prejudicial to the administration of justice)

Other opinions cited:

• SC Ethics Advisory Opinions 92-06, 93-14, 94-20 (duty to hold funds when the client objects to an assignment)
• SC Ethics Advisory Opinion 93-31 (no affirmative duty where the insurer's subrogation claim is only potential)

See also

• SC Bar Ethics Op. 05-07: A charging lien on a client's support payments
• ABA Formal Op. 471: Surrendering a former client's papers and property

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-05-08/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 05-08

RULES 1.15, 8.4(d)

Facts
Attorney settled a tort claim. Following the settlement but prior to the disbursement of any settlement funds, Attorney was notified by a health insurance carrier (“Carrier”) that Carrier holds a subrogation claim for the medical expenses paid in connection with Client’s injuries. Attorney has not promised Carrier to protect its claim from the proceeds of the settlement.

Client has instructed Attorney not to pay Carrier’s subrogation claim but instead indicated Client will pay the claim himself. Attorney believes Client will not pay the claim. Client has demanded Attorney disburse the settlement proceeds solely to Client.

Questions
Must Attorney pay the disputed funds to Client, notify Carrier that Attorney is about to do so, or hold the funds in trust?

How should Attorney handle the typical language of a release stating that Attorney “warrants” that all subrogation claims have been paid? Attorney understands Carrier wants indemnification for any claims by the carrier, but if Client wants the settlement funds without paying the subrogation claim, how can Attorney settle the case and sign the release with the “warranty” language?

Summary
Because Attorney has actual knowledge of Carrier’s “subrogation claim,” Rule 1.15 of the South Carolina Rules of Professional Conduct requires Attorney to hold the disputed funds in trust until such time as the dispute between Client and Carrier is resolved.

It would be improper for Attorney to execute a release warranting that all subrogation claims have been paid until such time as they have, in fact, been paid.

Opinion
Although Rule 1.15 of the South Carolina Rules of Professional Conduct does not specifically address how Attorney should handle the present dispute between Client and Carrier. However, an analysis of these situations has been presented in an authoritative text.

When a client has assigned an interest in a potential recovery to a creditor, the lawyer may honor the assignment when disbursing funds, unless the client objects. S.C. Bar Ethics Adv. Op. # 92-06. If the client directs the lawyer to ignore the assignment, the lawyer should notify the assignee and hold the funds in trust until the dispute between the client and the assignee is resolved. The lawyer has these obligations even if the lawyer is not a party to the assignment or has not agreed to protect the assignee’s interests. . . . Accord S.C. Bar Ethics Adv. Op. # 93-14 (disagreeing with prior Bar opinions that had held that the lawyer should follow the client’s instructions unless the lawyer was a party to the assignment) and S.C. Bar Ethics Adv. Op. # 94-20 (obligation applies if lawyer has knowledge of doctor’s lien even in absence of provision in engagement agreement). . . .

However, if an insurer has a potential subrogation claim but has not notified the lawyer that it is seeking subrogation, the lawyer does not have an affirmative duty to contact the insurer to inform it that the lawyer has received funds. The lawyer should disburse funds to the client, but should advise the client of the health care provider’s right to seek subrogation. S.C. Bar Ethics Adv. Op. # 93-31.

Robert M. Wilcox and Nathan P. Crystal, Annotated South Carolina Rules of Professional Conduct (2002 ed.), p. 132-33.

Because Attorney has knowledge of an actual “subrogation claim” and not merely the potential of one, Attorney has an affirmative duty to hold the disputed funds in trust until such time as the dispute between Carrier and Client is resolved.

It would be improper for Attorney to execute a release in which Attorney warranted all subrogation claims had been paid, when Attorney had knowledge that one such claim had not yet been paid, particular in light of Carrier’s demand to Attorney for payment. Rule 8.4(d).